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Featured Analysis |
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10/10/08
Business Analysis
Libor (London Interbank Offered Rate), one of the most famous acronyms in global finance, is a casualty of the current credit crisis. The credibility and reliability of this universal benchmark of short-term interest rates has come into question, with a potentially incalculable impact on the smooth functioning of markets and financial contracts. Entrenched for over 20 years as the money-market measuring tool, it came under suspicion earlier this year, mainly for not being measured correctly. More...
16/09/08
Alternative Investments
The Securities and Exchange Commission (“SEC”) recently proposed amendments to Rule 15a-6 under the Securities Exchange Act of 1934 (the “Exchange Act”), which provides limited exemptions to foreign broker-dealers to engage in activities with U.S. investors, including hedge funds, private equity funds and other investors in foreign securities. The proposed amendments to Rule 15a-6 would expand the category of U.S. investors that foreign broker-dealers may contact for the purpose of providing research reports and soliciting securities transactions. More...
10/09/08
Alternative Investments
The financial crisis that began more than a year ago now, after the sudden fall in the prices of investments backed by subprime loans, sent shockwaves through the markets, with unprecedented writedowns of asset values continuing to undermine the foundations of the banking system and leading to a pronounced economic slowdown. The great increase in risk aversion ultimately led to great adjustments in the stock markets. Since the initial falls of June 2007, the major stock market indices have posted losses in the double digits. More...
29/08/08
Alternative Investments
The staff of the Securities and Exchange Commission (the “SEC”) issued a no-action letter on July 15, 2008, clarifying that Rule 206(4)-3 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), known as the “cash solicitation rule,” does not apply to a registered investment adviser’s cash payment to a person solely to compensate that person for soliciting investors or prospective investors for an investment pool, such as hedge funds, managed by the adviser. More...
19/08/08
Alternative Investments
On Friday 13 June (who said regulators lacked a sense of humour?) the FSA announced that it was introducing provisions into its Code of Market Conduct, effective from Friday 20 June, which would require the disclosure of significant short positions in stocks admitted to trading on a prescribed market (which includes all the markets established under the rules of a UK recognised investment exchange, such as the London Stock Exchange). For this purpose, a significant short position is defined as a short position representing an economic interest of 0.25% of the issued share capital of a company, including any form of economic interest in the shares of the issuer, but excluding any interests held in the capacity of market maker. More...
22/07/08
Liquidity Risk
Showing assets at fair (market) values in balance sheets has provoked one of the most furious debates of the credit crunch. Many authoritative industry, media and academic figures are attacking this approach for aggravating the crisis. Collectively, they make a conceptual and practical case for mitigating the damage by modifying the accounting methodology. The critical question is whether their arguments are compelling enough to justify changing a system put in place after years of consultation and inquiry. More...
22/07/08
Credit Risk
With a credit rating of AAA, and a coupon of Libor plus 200bp, the CPDO was initially hailed as the “holy grail” of credit investing. Unfortunately, the market volatility of the past 18 months has shown that its AAA rating was not deserved. In this article we show that despite this, there is some merit in the CPDO mechanism which means that it could regain popularity in the credit market, albeit in a more conservative form. More...
22/07/08
Performance
The first IPE-EDHEC Institutional Asset Management Awards (IAMAs) were presented at a gala ceremony in Paris on June 12 compered by French television personality Eglantine Eméyé. The ceremony took place during the EDHEC Institutional Days before an invited audience of investors, asset managers, investment banks and other industry advisers and suppliers. More...
24/06/08
Alternative Investments
A new sector with promise is the ancient pastime of betting on ships and their voyages, which is springing to modern life and enjoying massive growth through the introduction of derivatives. This sector offers a variety of techniques for making money at both micro and global macro levels. Enterprising hedge funds and investment banks have already entered the field, which is as yet largely undiscovered by institutional investors. Relatively unaffected by the credit crunch, investments in this area have produced substantial returns recently. More...
18/06/08
Alternative Investments
Deusche Bank published in May its 6th Alternative Investment Survey. As a reminder, Deutsche Bank’s survey is not a quantitative and/or qualitative analysis of the hedge fund industry on a given period, but presents expectations, forecasts, and opinions of investors about the hedge fund industry. More than 1000 investors, totalizing nearly USD1 trillion in hedge fund assets, participated in the survey. Funds of funds are the most represented (40%), followed by family offices, high net worth individuals and wealth management companies (22%), pensions, endownments and foundations (15%), consultants (13%), and banks, corporations and insurance companies (10%). More...
20/05/08
Indexes
While an ever increasing share of equity
assets is invested in indexing strategies, the
standard practice of using capitalisation
weighting to construct stock market indices
has been the object of much criticism.
In response to this criticism, equity indices
with different weighting schemes have
emerged. Some indices use "fundamental"
metrics (Arnott, Hsu, and Moore 2005) to
weight the component stocks. In recent
years, the market for such characteristics-based
indices has grown tremendously, with
more and more providers launching and offering
them. Institutional investors have allocated
significant amounts to these alternatives
to value-weighted indices. Likewise, a wide
range of exchange-traded funds on these
new indices is now available. More...
18/04/08
Sovereign Funds
Sovereign Wealth Funds (SWFs) owned by governments round the world are expected to become a major force in the global asset management industry, with total assets forecast to exceed $12 trillion by 2015. Their potential activities are causing considerable concern among western governments, but a wide spectrum of commercial organisations are positive. The answer to which of these sharply opposed attitudes is justified carries profound implications for the evolution of global finance. The dominant emotion amongst western political circles seems to be a fear that Machiavellian motives, rather than the pursuit of investment performance, might guide the policies of these funds controlled by foreign governments. These worries however, are far from universally held in the west.
More...
17/03/08
Institutional Investment
In its response to the CEIOPS consultation on the preliminary technical specifications for the fourth quantitative impact survey (QIS4), EDHEC argues that the main risk faced by life insurance companies is not taken into account in the standard formula. This risk is that following market (or other significant) losses, a wave of surrenders leaves shareholders bearing the entirety of losses. This is the phenomenon that led to such bankruptcies as that of Executive Life, where losses made public by rating agencies and the media triggered a wave of surrenders and bankruptcy–even though the losses alone were thought bearable for some time. More...
14/02/08
Performance
Assets under management managed by French mutual funds reached €918bn at the end of what proved to be a particularly turbulent year. Indeed, 2007 was the first year in a decade in which outflows reached €44.7bn. While assets under management topped the €1,000 bn mark during the course of 2007, growth in EuroPerformance's French mutual funds slowed on the back of
the morose economic and financial climate seen over the second half of the year, coming in at -2.5% for the full twelve months. More...
14/02/08
Credit Risk
The purpose of this article is to introduce the reader to the US subprime mortgage market and to explain the factors which have led to the subprime crisis. Once upon a time, local banks lent money to local citizens to help them to buy their home. Based on first-hand knowledge of the creditworthiness of the borrower, an independent appraisal of the value of the house, and the size of the down-payment, the bank would decide if they were happy to assume the credit risk and if so, the loan went ahead. The bank would charge the borrower an interest rate which would be higher than the interest rate paid to its depositors, and the difference would be used to compensate the bank against the risk of a default by the borrower and to provide a fee. More...
21/01/08
Indices
Although there are many problems with value-weighted stock market indices, these indices are clearly the most firmly established in the financial industry. Recently, in the equity universe, there has been an increasing variety of indices, with new weighting methodologies, and an extension of indexing to asset classes such as hedge funds and real estate. In the equity universe, there is a wide range of alternative index construction methodologies that compete with standard value weighting. Characteristics-based indices, weighted by variables such as firm size, book-value, income,
and sales, are used for increasing amounts of assets and have been the focus of many recent media reports. More...
17/12/07
Alternative Investments
In the last quarter, the cumulated volume of transactions on the UK commercial property swap market broke the GBP10bn mark, the nascent French and German markets almost reached the GBP1bn mark, and the first Swiss deals were recorded. Meanwhile in the U.S. a market in NPI swaps finally took off and a flurry of new indices were introduced to serve as underliers for derivatives transactions. On October 1st, LIFFE launched futures on European indices of listed real estate companies, following in the steps of the CBOT, which started offering US REIT derivatives in February. More...
18/11/07
Risk Management
Risk management can be achieved in two possible ways, one being the reduction of risk through proper asset allocation decisions (diversification benefits), the other being the elimination of risk through the use of suitably designed solutions based either on derivative instruments or dynamic asset allocation strategies (hedging benefits). Before presenting an overview of how to implement asset management with a focus on risk control, the authors first introduce the modern framework for institutional money management known as the core-satellite approach, which advocates a separation of beta and alpha benefits in the portfolio performance. More...
09/11/07
Institutional Investment
The proposed Solvency II level 1 directive has been supported by most of the industry. This directive paves the way for the implementation of the Solvency II regulation, which can be considered a huge step forward for the insurance industry. The European Insurance and Reinsurance Federation, CEA, recently issued a position paper, which, while strongly supporting the European directive, has underlined some potential weaknesses or risks within the new supervision scheme, in particular the threat of the SCR’s being treated as a "hard target", as a sort of minimum capital requirement, in other words. More...
17/10/07
Exchange-Traded Funds
A previous article introduced some of the results of the EDHEC European ETF Survey 2006 when discussing the topic of core-satellite investing. The present article looks in more detail at the responses given to the survey and the overall conclusions that can be drawn on the use of ETFs by European investors. More...
16/10/07
Exchange-Traded Funds
In a recent survey, the EDHEC European ETF Survey 2006, the EDHEC Risk and Asset Management Research Centre carried out an in-depth study on the use of ETFs (Exchange-Traded Funds) by European institutional investors, private bankers and asset managers. This article examines the benefits of using ETFs within the core-satellite investment approach. As a result of tight tracking error constraints, only a limited part of traditionally managed portfolios is actively managed, while the essential part of the portfolio passively replicates its benchmark. More...
16/10/07
Alternative Investments
While the ability to replicate hedge funds is still being widely debated, the last few months have seen one hedge fund clone launch after another. Partners Group, which is considered the pioneer in this area, launched its Alternative Beta Strategies at the end of 2004. Partners were followed by Rydex Investments and AlphaSwiss in 2005, and Merrill Lynch and Goldman Sachs in 2006. In September 2007, more than 20 hedge fund replicators were on the market. Some institutions have launched several clones, for example HedgeIQ with four clones, and Merrill Lynch with three. The main arguments that are presented at each launch are basically the same, i.e. lower costs than individual funds or funds of funds, easier access to the hedge fund universe by lowering the minimum investment level, or better liquidity. More...
11/10/07
Alternative Investments
High-conviction funds, beta-one funds, short extension funds, limited-shorting funds, long-enhanced funds, active extension funds, hedge-fund lite: there is a wide range of terms for what is most frequently called 130/30. This paper examines some crucial points related to these funds: their theoretical foundation, the optimal level of shorting, the distinction between the quantitative and fundamental approaches, whether these funds are natural extensions of long-only funds, and finally the risk of neglecting their risk. More...
03/10/07
Best Execution and Operational Performance
In response to a letter from the European Commission on EDHEC's position paper, "MiFID: the (in)famous European Directive?", EDHEC have reiterated that there are a number of issues that may threaten the fairness of the market upon the demise of the concentration rule currently prevailing in many member states. These issues are related to three aspects of the Directive that are supposed to act as counterweights to the consequences of the likely fragmentation of the market: the post-trade transparency obligation; the pre-trade transparency obligation; and best execution.
More...
17/09/07
Real Estate
Property derivatives have been promoted as a revolutionary tool for real estate portfolio risk management, Frédéric Ducoulombier of the EDHEC Risk and Asset Management Research Centre argues that this is a misguided approach that obscures the key benefits of these instruments. This article introduces property derivatives and hedging, points out the specificities of the real estate market that impact an investor’s ability to hedge with index-based products, and looks at the empirical evidence that can help predict hedge effectiveness in the real estate market.
More...
17/09/07
Alternative Investments
Within the equity risk sub-module of the third Quantitative Impact Study (QIS3) undertaken by the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS), a preamble to the Solvency II supervisory standard, all alternative investments are subject to a capital charge of 45%, nearly 50% higher than the 32% applied to regular equity exposures. In this article, we briefly go over the calculations required for equity risk, and then include a reminder of why hedge funds on average are certainly not the riskiest bet an investor can make. More...
23/07/07
Alternative Investments
In May 2007 the Organisation for Economic Co-operation and Development (OECD) issued a report by Adrian Blundell-Wignall entitled “An overview of hedge funds and structured products: issues in leverage and risk.”
According to the OECD report, structured products from investment banks have so far benefited from a virtuous cycle: the absence of volatility anomalies has allowed hedge funds to successfully sell portfolio insurance for these products to investment banks, thus contributing to a reduction of volatility risk, a narrowing of spreads, and considerable market growth. However, neither investment banks nor hedge funds have stress-tested their portfolios. More...
17/07/07
Industry Analysis
In its latest study—made public on July 9, 2007—on the pension commitments of the CAC-40 companies, Mercer Human Resource Consulting analyses the consolidated accounts of those companies on December 31, 2006, with particular attention to the appendices referring to commitments for pensions and other post-employment benefits. These commitments are as crucial to the appropriate management of human resources as they are to financial and accounting management.
Accounting for pension commitments is a major issue for these companies, which have had to follow international accounting standards since January 1, 2005. Regulations concerning the quality and the transparency of information have become more and more stringent.
More...
16/07/07
Alternative Investments
On June 25th, 2007, the U.S. Senate Permanent Subcommittee on Investigations released a report on the Amaranth debacle, entitled, “Excessive Speculation in the Natural Gas Market.” The report was released in conjunction with the subcommittee’s public hearing on the same date. The 135-page report (and its further 345 pages of appendices) provides a wealth of detail on the largest hedge-fund debacle to have thus far occurred. The report provides factual detail on how massive Amaranth’s natural-gas positions were and discusses how inadequate the U.S. regulatory approach currently is in the face of large-scale energy trading. This review summarizes what the report covered, and briefly touches upon important areas that the report omitted. More...
13/07/07
Real Estate
After reviewing the NCREIF Property Index, Frédéric Ducoulombier of the EDHEC Risk and Asset Management Research Centre looks at the transaction-based indices also competing to serve as underlyings for the budding US property derivatives markets. More...
11/07/07
Alternative Investments
At the inaugural EDHEC Research Day held in Paris on 7th June, Jean-François Lepetit, Associate Professor at EDHEC, Chairman of the EDHEC Risk and Asset Management Research Centre's International Advisory Board and recently appointed chairman of the CNC (Conseil National de la Comptabilité or National Accounting Council), delivered a presentation on Regulation and Hedge Funds. More...
27/06/07
Alternative Investments
Institutional assets have been flowing into hedge funds for the past several years, with repercussions for all alternative investment players. The general expectation is that these flows will continue and increase. Infovest21 conducted over the first quarter of 2007 a survey of 108 American institutional investors to better determine their motivations and concerns when allocating to hedge funds or funds of funds. Three major themes, which are developed in the first part of our article, are highlighted in the survey: the conservative approach and main concerns of institutions allocating to hedge funds; the key criteria in manager selection; and differences between endowments and pensions concerning their experiences and views on hedge funds.
More...
31/05/07
Style Analysis
Style analysis of portfolios and mutual funds is a subject of great interest both for investors and managers, as style management is related to funds’ risk and return characteristics. Two different methods make it possible to perform this analysis. The first one is the return-based style analysis (RBSA) and the second is called holding-based style analysis (HBSA). More...
21/05/07
Alternative Investments
The International Organization of Securities Commissions (IOSCO) this month issued for public review and comment its Principles for the Valuation of Hedge Fund Portfolios. The purpose of the Principles is to ensure that hedge funds' financial instruments are appropriately valued and that fund investors are not disadvantaged by inaccurate valuations. More...
30/03/07
Real Estate
In mid-2005, the National Council of Real Estate Investment Fiduciaries and Credit Suisse First Boston entered into an exclusive agreement to develop property derivatives in the United States. While only two NCREIF swaps have been reported to date, several new indices have hit the market at the end of 2006 and more are in the wings.
In a two-part article, Frédéric Ducoulombier of the EDHEC Risk and Asset Management Research Centre looks at the characteristics of the indices vying to serve as underlyings for the budding US property derivatives markets. Part 1 looks at the appraisal-based NCREIF Index; Part 2 introduces its various transaction-based challengers. More...
21/03/07
Alternative Investments
Will the hedge fund industry imitate the mutual fund industry by following the path of passive investing? This question is at present one of the hottest in the alternative universe, where the ability to replicate hedge funds is being extensively debated. Whatever the term used – clone, synthetic fund or replication index – this new product is presented as a third generation of products in the passive representation of hedge funds, after non-investable indices and investable indices.
More...
18/03/07
Real Estate
Long present in the books of European institutional investors, real estate began to gain acceptance amongst U.S. investors in the 1970s and investors worldwide are now seeking to increase their allocations to this asset class. Real estate assets are traditionally regarded — and marketed — as real and therefore solid investments that offer attractive risk-adjusted returns, significant portfolio diversification benefits, a high and stable income component and long-term inflation protection. More...
02/03/07
Alternative Investments
On February 22, 2007, the President’s Working Group on Financial Markets (the “Working Group”) issued guidelines for the oversight of hedge funds, private equity funds and other private pools of capital, entitled “AGREEMENT AMONG PWG AND U.S. AGENCY PRINCIPALS ON PRINCIPLES AND GUIDELINES REGARDING PRIVATE POOLS OF CAPITAL”. The Working Group consists of representatives from the Treasury, the Federal Reserve, the Securities and Exchange Commission and the Futures Trading Commission. More...
28/02/07
Institutional Investment
A new EDHEC position paper entitled "CP20: Significant improvements in the Solvency II framework but grave incoherencies remain", by Philippe Foulquier, Director of the EDHEC Financial Analysis and Accounting Research Centre, and Samuel Sender, Research Associate with the EDHEC Risk and Asset Management Research Centre, contains EDHEC's answer to CP20, a consultation process initiated by CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) on the "Advice to the European Commission in the Framework of the Solvency II Project on Pillar I Issues". More...
26/01/07
Alternative Investments
In a reply to the CESR Issues Paper on the eligibility of hedge fund indices for the purpose of UCITS, the EDHEC Risk and Asset Management Research Centre argues that hedge fund indices should not be required to offer more controls and more transparency than existing financial indices such as stock market indices. Likewise, their construction should not be subjected to detailed rules for choosing constituents and implementing rebalancing and weighting mechanisms. More...
23/01/07
Transaction Cost Analysis
A new report from EDHEC Risk Advisory, Transaction Cost Analysis in Europe: Current and Best Practices, which was commissioned by HSBC Investment Bank, reviews the conditions in which buy-side firms (traditional and alternative) are currently monitoring transaction costs and investigates the various issues related to transaction cost analysis in the context of the Markets in Financial Instruments Directive due to be enforced in November 2007. This directive contains an important provision related to Best Execution. More...
16/01/07
Alternative Investments
The Securities and Exchange Commission (the “SEC”) has published the text of its proposed new rules for advisers to hedge funds and private equity funds. First, the SEC are proposing to adopt a new antifraud rule under the Investment Advisers Act of 1940 (the “Advisers Act”) that would clarify, in light of the recent court decision in Goldstein v SEC, 451 F.3d 873 (D.C. Cir. 2006), the ability of the SEC to bring enforcement actions under the Advisers Act against investment advisers who defraud investors or prospective investors in a hedge fund or other pooled investment vehicle. More...
10/01/07
Alternative Investments
On December 13, 2006, the Securities and Exchange Commission (the “Commission”) voted to propose new rules that will provide additional protections to investors in hedge funds and other pooled investment vehicles. The proposals include new antifraud provisions under the Investment Advisers Act of 1940 (the “Advisers Act”) and new marketing provisions under the Securities Act of 1933 (the “Securities Act”). The Commission’s proposals are a reaction to a U.S. Court of Appeals ruling earlier this year overturning their new hedge-fund registration requirements, thereby significantly limiting their authority to monitor such fund’s activities. As a result of this decision, the Commission’s concerns about industry fraud and the potential risk to ordinary investors, voiced over the last three years, were left unaddressed.
More...
14/12/06
Institutional Investment
In a new position paper by Philippe Foulquier, director of the EDHEC Financial Analysis and Accounting Research Centre, and Samuel Sender, research associate with the EDHEC Risk and Asset Management Research Centre, entitled ‘QIS 2: Modelling that is at odds with the prudential objectives of Solvency II’, EDHEC regrets the approach chosen by the CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) for the European Commission as proposed in the QIS 2 (Quantitative Impact Study 2), which does not favour optimal management of the risks of European insurance companies. In light of the changing face of risks and how they are perceived, the existing prudential rules are totally inadequate and the European Commission has established a vast project to overhaul the methods used for calculating the solvency of insurance companies. More...
15/11/06
Indices
Felix Goltz Over the past few years, the hedge fund market has probably constituted the most remarkable growth area within the fund management industry. Investable hedge fund indices have appeared, trying to build on the passive investing argument that a lot of institutional investors are familiar and comfortable with from their equity portfolios. However, a sometimes confusing debate on the usefulness of indices has emerged, with some stating that indices contradict the very nature of the investment strategies followed by hedge funds. More...
05/10/06
Indices
V. Le Sourd & F. Goltz Benchmarks are an essential part of the investment process for most investment managers. They play a critical role in both asset allocation and performance measurement. Often however, benchmark selection is not given the attention it requires. Despite the development of techniques for constructing customised benchmarks or normal portfolios, reflecting the manager’s strategic asset allocation, most investment managers still use simple market indices. More...
05/10/06
Alternative Investments
François-Serge Lhabitant When investing in hedge funds, the control of risk should be of primary importance, while gaining some return in excess of the risk-free rate should only be a secondary objective. Many investors tend to forget this basic principle, and therefore end up holding alternative portfolios that do not match their risk/return expectations. One should always remember that risk, by itself, is not bad – it normally implies gaining some risk premium. What is bad is a risk that is misunderstood, or even worse, not detected. More...
04/10/06
Alternative Investments
Noël Amenc et al. While there has been a significant amount of research on the predictability of traditional asset classes, and the implications in terms of tactical asset allocation strategies, very little is known about the predictability of returns emanating from alternative vehicles such as hedge funds. Also, and not surprisingly given the absence of academic evidence on the predictability of hedge fund returns, very little is known about the performance of tactical asset allocation strategies involving hedge funds. More...
04/10/06
Hedge Fund Indices
Walter Géhin & Mathieu Vaissié In contrast with high net worth individuals, who focused on absolute returns, the more recent investors in the hedge fund universe — especially institutional investors — require risk-adjusted performance measures. Unfortunately, the limitations of traditional performance measures (e.g. the Sharpe ratio) and multi-factor models have been successively identified. Although hedge fund indices have received increasing acceptance, they suffer from numerous theoretical shortcomings and practical challenges, and the engendered heterogeneity of the returns, as shown in the academic and practitioner literature, suggests that the selection of an index is not a free lunch. More...
04/10/06
Alternative Investments
Felix Goltz After tremendous growth over the last decade, the hedge fund industry has clearly entered a more mature stage. From an initial phase, when some high net worth individuals invested in hedge funds, the industry has moved into the mainstream as more and more institutional investors have started allocating to, or at least looking at, hedge funds as a distinct asset class. As these investors consider investing in hedge funds, it is useful to review the benefits they can expect. In addition, a question that directly results from the diversity of the products available is: “How should institutions choose to access hedge funds in order to maximise these benefits?” More...
03/10/06
Alternative Investments
In a little over a week, Amaranth Advisors, a respected, diversified multi-strategy hedge fund, lost 65% of its $9.2 billion assets. In a paper entitled ‘EDHEC Comments on the Amaranth Case: Early Lessons from the Debacle’, noted commodities expert Hilary Till, Research Associate with the EDHEC Risk and Asset Management Research Centre and Principal of Premia Capital Management, LLC, examines how Amaranth could have suffered such massive losses and draws lessons from this debacle for investors, funds of fund & energy fund risk managers, multi-strategy hedge fund managers, policy makers, and the alternative investment industry as a whole. More...
02/10/06
Hedge Fund Strategies
Noël Amenc and Lionel Martellini Just because a fund is a hedge fund does not mean that the risk-free asset is necessarily a good benchmark. While nearly all hedge funds highlight a so-called "absolute return" policy, the risk-free rate is only a good benchmark if certain conditions are respected. The objective of this article is to emphasise the role that hedge fund strategies can play in traditional investors’ portfolios. More...
29/09/06
Alternative Investments
Noël Amenc et al. In 2003, the EDHEC Risk and Asset Management Research Centre presented a detailed survey on European Investment Management practices, highlighting major discrepancies between current industry practices and leading academic thought. This article covers the main findings of the survey with regards to the management of risks, describes the importance of the risk management function and discusses the various techniques available to investment managers. More...
29/09/06
Alternative Investments
Mathieu Vaissié Hedge fund strategies have long been regarded as “absolute return strategies”. Investors who suffered as a result of their sub-optimal diversification policy after the bursting of the Internet bubble began to look at alternative investments as a way to improve their protection. In particular, they became interested in the genuine diversification properties of hedge funds and progressively introduced them into their “Core” portfolio. However, capitalising on the diversification potential of hedge funds requires a good understanding of the risk characteristics of hedge fund strategies. More...
26/09/06
Performance Persistence
The debate remains open for the performance indicator that is best adapted to the specific characteristics of hedge fund return distributions, and new propositions are regularly formulated to replace the traditional performance measures like the Sharpe ratio. After the calculation of risk-adjusted returns, whatever the formulas employed, another aspect of performance takes on particular importance, namely the persistence of the performance. More...
22/09/06
Fund Ratings
Noël Amenc The rating of mutual funds has been an area of considerable growth not only in the United States but also in Europe. Increasingly demanding investors now require fund performance measurements that are both relevant and scientifically rigorous. More...
21/09/06
UCITS Eligibility
In a document entitled ‘A Reply to the CESR Recommendations on the Eligibility of Hedge Fund Indices for Investments of UCITS’, Noël Amenc and Felix Goltz of the EDHEC Risk and Asset Management Research Centre have urged the CESR to reconsider their position on suspending the eligibility of hedge fund indices. More...
21/09/06
Performance Measurement
Noël Amenc and Jean-René Giraud In 2003, the EDHEC Risk and Asset Management Research Centre presented a detailed survey on European Investment Management practices that highlighted significant discrepancies between current industry practices and leading academic thought. The risk-adjusted measure favoured by professionals still relies to a large extent on the Sharpe ratio, which assumes that fund performance can be reduced to the first and second order moments of the return distribution. More...
21/09/06
Alpha League Table
Virginie Buey and Peter O'Kelly The EuroPerformance-EDHEC and Alpha League Table for Switzerland reveals that the best ‘alpha’ performers are the most illustrious and venerable institutions in Geneva and Zurich. This article offers a look at the table's top companies and how they got to where they are. More...
20/09/06
Alternative Investments
Core and satellite portfolio construction is recognised as an effective strategy for institutions that want to diversify their portfolios without giving up the potential for higher returns generated by selected active management strategies. It also provides the framework for targeting and controlling those areas where investors are willing to take more risk in a cost-efficient manner. More...
18/09/06
Alternative Investments
Mathieu Vaissié For several months, investors and their advisors have been worrying about the profitability prospects for hedge funds, faced with fears that hedge fund alpha is diminishing. The objective of this article is to examine whether the opinions on the capacity effect of the finance professionals in the field, and their views on the real sources of hedge fund performance, are consistent with academic findings. More...
18/09/06
Alternative Investments
Lionel Martellini and Volker Ziemann Recent difficulties have drawn attention to the risk management practices of institutional investors in general and defined benefit pension plans in particular. The fact that institutional investors have been so dramatically affected by market downturns at the beginning of the new millennium has led to major changes in institutional money management, including notably the need for an increased focus on asset-liability management (ALM). More...
15/09/06
Alternative Investments
The advantages offered by hedge funds do not come without a downside. Exposure to alternative risk factors is a source of superior return-risk trade off and is the very essence of hedge funds’ extensive diversification possibilities when compared to traditional investments. However, such exposure usually requires trading activities that can be considered less conventional than in the long only universe. More...
15/09/06
Alternative Investments
There are two main challenges involved in the application of standard asset allocation methods to the design of optimal portfolios that include hedge funds. One is that it is extremely difficult to obtain a forward-looking estimate of a hedge fund’s expected return. The other comes from the fact that in general hedge fund returns are not normally distributed, which makes the use of any asset allocation model based on sole estimates of expected return and volatility somewhat problematic. More...
15/09/06
Alternative Investments
The US Securities and Exchange Commission (SEC or Commission) has continued with its efforts to address the fallout from the decision in the Goldstein Case. The latest action in its ongoing attempts to bring hedge fund advisers under greater scrutiny came in the form of a letter to the American Bar Association setting out the Commission’s views following the vacating of the rule 2003(b)3-2 placing registration obligations on hedge fund managers. More...
31/08/06
Alternative Investments
At the beginning of June, the FRR (Fonds de Réserve pour les Retraites) announced its decision to allocate 10% of its assets to so-called alternative products. The reason highlighted was the risky nature of the current composition of the fund, which is dominated by two asset classes, stocks and bonds. The allocation to alternative products targeted by FRR is part of a diversification logic: by being exposed to different risk factors (i.e. different asset classes) the portfolio’s sensitivity to a given source of risk is reduced. This aims to generate returns that present greater stability over time.
However, the FRR’s decision to allocate 10% of its assets to alternative products is accompanied by a decision to exclude hedge funds from that allocation. More...
27/07/06
Alternative Investments
A US federal appeals court has unanimously held that the Securities and Exchange Commission (SEC) exceeded its authority when it adopted a controversial new rule requiring hedge fund managers to register as investment advisers with the SEC, throwing the SEC’s long-running battle to better regulate hedge funds into doubt and disarray. The shock decision leaves hedge fund managers and their investors in limbo, while they await a definitive response from the SEC on how it intends to regulate this $1.5 trillion industry in the future.
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25/07/06
Indices
Looking at the market for equity indexing, it is easy to see that capitalization weighting dominates the offerings. In fact, most investors probably do not even ask whether other types of indexes should or do exist. In addition to being standard practice, capitalization weighting receives theoretical backing from the original Capital Asset Pricing Model (CAPM), established by William Sharpe in 1964. However, capitalization weighting is currently under fire from both academic scholars and industry practitioners. This article reviews the reasons for this. More...
07/06/06
Industry Analysis
Like most European countries, the Nordic countries – Denmark, Finland, Iceland, Norway and Sweden - have also implemented Solvency I in their own legislation on the solvency requirements of insurance companies. However, for pension funds, some countries apply the Basel I rules (e.g. Norway) even though these rules are generally applied by commercial banks and financial companies. Some countries set up their own solvency requirements (e.g., Sweden, Finland). In this article, we will review the solvency requirements for insurance companies and pension funds in those countries. More...
13/05/06
Indices
Fundamental weighting indexing has drawn some attention recently, following the launch of a fundamental weighting index by the FTSE Group and Research Affiliates at the end of last year. In this article, we will first describe the construction methodology of fundamental weighting, and then review some pros and cons concerning this method that have been brought up in the industry.
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04/05/06
Alternative Investments
Over the past five years, the number of hedge funds has increased to over 8,000, with assets under management exceeding US$1 trillion. Generally speaking, hedge funds operate with few constraints in order to achieve the absolute return, or “alpha”, that they seek. As the funds themselves are largely unregulated, the investor relies primarily on the directors of the fund to oversee the arrangements entered into with third parties, such as the investment manager. More...
02/05/06
Industry Analysis
In order to improve the protection of policyholders and enhance the financial health and sustainability of insurance companies, European countries have revamped their related insurance laws in recent years within the framework of the EU regulations. In this article, we will look at the EU directives and review the recent developments on the solvency requirements of insurance companies in some European countries. More...
03/04/06
Indices
Interest in indexed real estate investments from investors and asset managers is increasing, as evidenced by recent launches of index products such as ETFs. In this article, we will give an overview of some general concerns relating to the construction of real estate indices. More...
17/03/06
LDI
The concept of LDI (Liability Driven Investment) has spread quickly in recent decades among defined benefit pension fund managers. In this article, we review the motivation behind LDI strategies, the concept of LDI and recent market developments relating to LDI. More...
13/03/06
ETFs
Built on the foundations of the efficient market hypothesis, the idea behind indexation is relatively straightforward: if modern capital markets are efficient, the added value in search of alpha can only be negative. In other words, investing in an index that tracks the market portfolio is possibly the best bet for an investor. More...
09/03/06
Asset-Liability Management
In order to protect the benefits of pension beneficiaries, reforms on funding requirements have been taking place in many countries. It is believed that this will help the development of the second pillar in pension systems and help to alleviate the financial pressure on the state pension schemes, as it is thought that these will be a threat for governments in the not-too-distant future. In this article, we will compare the requirements relating to the asset-liability situation of pension funds in the US and Europe. More...
20/02/06
ETFs
In the realm of asset management, the Exchange Traded Fund (ETF) is not an unfamiliar term to savvy investors. Compared with traditional mutual fund and pooled products, ETFs provide investors with some significant advantages, such as lower fees, an exchange listing and the ability to trade continually, as well as minimisation of capital gains distributions. More...
20/02/06
Asset-Liability Management
As a worldwide trend, pension reforms are ongoing in many countries. This is especially the case in developed countries which will face problems with aging populations and the associated heavy burden on pension payment in the near future. Accompanying the reforms in the pension system, measures to improve the governance and transparency of the pension funds are also being introduced in those countries. More...
10/02/06
Alternative Investments
U.S. hedge fund managers are being or will be more regulated in the new legal environment, since the era of registration for hedge funds has begun and all registrations will be completed by February 1, 2006. On October 26, 2004 the Securities and Exchange Commission (SEC) voted 3 to 2 to adopt a regulation requiring most U.S. hedge fund managers to register as investment advisers. More...
18/01/06
Alternative Investments
Following its meeting in Sonoma, California on July 10-11, 2005, the Financial Economists Roundtable (FER), an international group of senior financial economists, issued a statement in which it warned about the risks involved in investing in hedge funds. The EDHEC Risk and Asset Management Research Centre, which has carried out a multi-faceted research programme on hedge funds over the past three years, has published a paper by Noël Amenc, PhD, and Mathieu Vaissié in response to the FER statement in which it comments on the FER’s recommendations. More...
18/01/06
Asset-Liability Management
Before 1979, there was no unified pension system in China. Firms provided all benefits, including medical expenses and pensions, to their employees. However, from the early 80s, with the development of the market economy, more and more problems began to challenge the original pension system. First of all, some enterprises began to suffer losses, so they did not have enough cash flow to pay for their retirees. More...
17/01/06
Asset-Liability Management
In 2000, pension expenditure in Italy reached 13.8% of its GDP. In the future, the pension system in Italy will face considerable challenges because of the demographic transfer – it is expected to be the ‘oldest’ country in the EU in a few years’ time. In order to sustain the stability of the economy, the Italian government has adopted a series of reforms in the past few decades. More...
12/01/06
Investment Management
The European Commission recently released a new green paper, "Green Paper on the Enhancement of the EU Framework for Investment Funds", which aims to consider the orientations for enhancing the UCITS framework to be announced in early 2006. More...
19/12/05
Alternative Investments
New Spanish Collective Investment Institutions (CII) regulations were approved by the Ministry of Finance on November 4, 2005. In the realm of alternative investment products, the Spanish market will be among the most modern after adopting these new regulations, in which most matters pertaining to the establishment, governance and transparency of funds, as well as retail investor protection, have been addressed. More...
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